Frank Said to Back
Broader Fed Audits

By

Sudeep Reddy

Updated Aug. 31, 2009 12:01 a.m. ET

Rep. Ron Paul said he has a commitment from the chairman of the House Financial Services Committee, Barney Frank, to advance the Texas Republican's legislation opening the Federal Reserve to broader federal audits.

In an interview Friday, Mr. Paul said Mr. Frank agreed to allow a vote on the bill and to work on language that would allow the Government Accountability Office, the investigative arm of Congress, to audit the Fed's monetary-policy operations. While details are unresolved, the discussions increase the likelihood that some version of Mr. Paul's bill will pass the House.

"Barney told me, 'It's going to come. You're going to get what you want,' " Mr. Paul said. "We're going to have some hearings and we'll get a vote."

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Barney Frank

A spokesman for Mr. Frank said the Massachusetts Democrat shares the goal of increasing transparency at the Fed. But he hasn't inked specific language and "wants to be sure that some parts of the Fed are adequately protected," the spokesman said.

In recent months, the Fed has released more information about its lending, though not the identities of individual banks borrowing through its discount window. Mr. Paul said he wants the audits to find out more about the Fed's dealings with foreign central banks, foreign governments and individual firms. "I want to know who they're loaning the money to," he said.

The key unresolved issue is how to avoid the perception that Congress is interfering with Fed independence in making monetary policy. Under current law, the GAO can audit some Fed operations -- such as bank regulation and consumer protection -- but not its core monetary-policy decisions.

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Mr. Frank told a town-hall meeting this month that the measure to audit the Fed would be incorporated into broader financial regulation and "probably" pass the House in October.

"We will subject them to a complete audit," Mr. Frank said at that meeting. He also said Mr. Paul "agrees that we don't want to have the audit appear as if it is influencing monetary policy."

Nearly two-thirds of the House has co-sponsored Mr. Paul's bill. Fed Chairman Ben Bernanke opposes the bill as written, saying it would compromise the Fed's ability to set interest rates free of political interference. "A perceived loss of monetary-policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability," Mr. Bernanke testified last month.

Mr. Frank has said any audit would release details of Fed transactions with financial institutions only after a lag. "If that was made instantly, you would have a lot people trading off of that and it would have too much impact on the market," he said earlier this month. "So we will probably have that data released after a time period of several months, enough time so it wouldn't be market sensitive."

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Ron Paul

The Fed currently releases minutes of its Federal Open Market Committee meetings, at which interest rates are set, with a three-week lag and transcripts after five years. In recent months, the Fed has released more information about its lending, though not the identities of individual banks borrowing through its discount window.

In the interview, Mr. Paul -- whose book, "End the Fed," will be published next month -- said he doesn't want the audits to interfere with monetary policy.

But he said he wants to know more about the Fed's dealings with foreign central banks, foreign governments and individual firms. "I want to know who they're loaning the money to," he said. "Youcan't have an audit and ignore the fact that somebody got billions of dollars. That doesn't mean we're going to be looking over the shoulders of the Federal Open Market Committee."

That could be done by setting audits to lag major decisions, or setting a regular schedule -- annual audits, for instance -- that's not tied to specific decisions, Mr. Paul said. "This is something to have the books open at an appropriate length of time," he said.

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